§ 83.3 — Rate of Interest to Cure Default: Contracts before October 22, 1994

Revised: June 1, 2004

[1]

When § 1322(e) does not apply—when the contract was entered into before October 22, 1994—there is chaos in the reported decisions with respect to the rate of interest required to cure default through the Chapter 13 plan. Even before the Supreme Court’s decision in Rake v. Wade,1 the reported Chapter 13 cases allowing interest on arrearages as an element of curing default under § 1322(b)(5) reached no agreement with respect to the appropriate rate of interest.2 The same can be said for the interest rates selected by courts applying Rake. After Rake, the courts have reported decisions allowing interest on defaults cured through Chapter 13 plans at the contract rate,3 the market rate,4 the prime rate,5 the state judgment rate 6 and variations of the above.7 There is no reason to expect time to bring greater certainty to this area of Chapter 13 practice.

[2]

In Rake, Justice Thomas explained that preconfirmation interest on defaults cured through a plan is an entitlement of the oversecured mortgage holder under § 506(b). Postconfirmation interest is required by § 1325(a)(5)(B)(ii). With respect to each of these sections, the courts have been unable to agree on the required rate of interest, and the rates applied for purposes of § 506(b) are not necessarily the same rates required by § 1325(a)(5)(B)(ii).8

[3]

Justice Thomas’s § 506(b) analysis in Rake borrowed heavily from the Supreme Court’s earlier interpretation of § 506(b) in United States v. Ron Pair Enterprises Inc.9 In Ron Pair, the Supreme Court read § 506(b) to allow postpetition interest to an oversecured claim holder even when the claim was secured by a nonconsensual lien. In Ron Pair, the Supreme Court expressed no opinion concerning the appropriate rate of interest under § 506(b). Cases applying § 506(b) both before and after Ron Pair reach no agreement on the appropriate rate of interest. A majority in number of the reported § 506(b) cases conclude that contract rate is the appropriate postpetition interest rate for an oversecured claim; however, even the courts allowing contract rate do not agree on the circumstances when “default” interest rates prevail over regular contract rates.10

[4]

When the oversecured claim arises from a nonconsensual lien rather than from a contract, there will be no contract to look to for § 506(b) purposes.11 In one reported case in which the oversecured creditor’s lien resulted from a default judgment, the court held that the judgment interest rate under state law was appropriate for § 506(b) purposes.12 When the contract rate of interest was 16 percent, another court applied a “reasonable” postpetition interest rate of 8 percent for purposes of § 506(b).13

[5]

If anything, the cases fixing the discount rate at confirmation for purposes of § 1325(a)(5)(B)(ii) are in greater disarray than the § 506(b) cases just discussed. As detailed elsewhere,14 at least prior to the Supreme Court’s decision in Till v. SCS Credit Corpo.15 there was no consensus whatsoever about the rate of interest for § 1325(a)(5)(B)(ii) purposes. There were reported § 1325(a)(5)(B)(ii) cases adopting the contract rate, the state rate on judgments, the prime rate, the market rate and blended rates based on some or all of the other rates.

[6]

After Rake, it is quite possible that an oversecured mortgage holder will be entitled to two rates of interest on defaults cured through the plan: the § 506(b) rate of interest will apply from the petition through the date of confirmation;16 the § 1325(a)(5)(B)(ii) rate of interest will apply after confirmation and until the arrearage claim is paid in full.17 Rake gives Chapter 13 debtors and mortgage holders a host of (unnecessary) reasons to litigate confirmation.

[7]

The mathematics of two different interest rates becomes complicated.18 Chapter 13 trustees will have to program their computers to apply one interest rate to the arrearage claim between the filing of the petition and confirmation and a different interest rate after confirmation. The negotiations between debtors and creditors with respect to these different rates could be intricate. In a jurisdiction that applies market rate at cramdown under § 1325(a)(5)(B)(ii),19 when market rates have risen since execution of the mortgage, the creditor is better off getting quickly to confirmation to accrue interest on defaults at the higher § 1325(a)(5) rate. If market rates are down since execution of the contract, the interest rate may be more favorable to the debtor after confirmation than before. Contracts with variable interest rates will be particularly fun. It can be hoped that debtors and oversecured mortgage holders will negotiate a single interest rate with respect to both components of curing defaults.

[8]

The mathematics of Rake is difficult to square with earlier Supreme Court authority. In the typical Chapter 13 mortgage cure, the defaults at the petition are monthly installments of principal and interest. This was true in Rake. Without any particular focus on the issue, Justice Thomas’s opinion allows postpetition and postconfirmation interest on both the principal and interest components of the prepetition arrearages.

[9]

The payment of interest on interest even to an oversecured claim holder is a controversial proposition that was directly addressed by the Supreme Court more than 50 years ago. In Vanston Bondholders Protective Committee v. Green,20 the Supreme Court denied interest on interest to first mortgage bondholders in a reorganization under the former Bankruptcy Act notwithstanding a contract provision for such interest, based on a finding that payment of interest on interest would unbalance the equities among creditors. Section 506(b) codifies the right of an oversecured claim holder to receive interest between filing and confirmation, but the legislative history of § 506(b) indicates congressional intent to follow, not change, the pre-Code law on this subject.21

[10]

Rake did not cite Vanston22 and did not discuss interest on interest. The effect of Rake is to allow postpetition interest on the unpaid mortgage installments that include principal and interest. It is unclear whether the equitable considerations in Vanston survived the enactment of § 506(b) with respect to the payment of postpetition interest on interest to an oversecured mortgage holder when a Chapter 13 plan proposes to cure defaults.

[11]

The interest on interest question leads directly to other issues: What is the amount of the oversecured mortgage holder’s arrearage claim, and how does it relate to the principal balance of the mortgage and the allowed secured claim? For example,23 assume that the debtor borrowed $50,000 at 10 percent interest based on a 20-year amortization. The monthly contract payment would be approximately $483. Assume that the debtor was in default by four payments—an arrearage of $1,932 at the petition. Assume further that the four unpaid installments were the first four payments due under the contract. At the petition, the debtor would have paid no portion of the $50,000 principal. A standard 20-year amortization of $50,000 at 10 percent interest indicates that the first four monthly payments would contain $1,665 of interest and $267 of principal. On these simplified facts, what is the mortgage holder’s allowed secured claim, and what is the amount of the arrearage that will accrue interest after the petition under Rake?

[12]

If the creditor files a claim for the $50,000 principal balance of its mortgage and files an arrearage claim for $1,932, the creditor is claiming twice for the $267 portion of the $1,932 arrearage that is unpaid principal. If Rake requires the debtor to pay postpetition interest on the entire $1,932 arrearage claim, then the creditor will collect interest and principal in several multiples: the creditor will get contract interest on the original $50,000 principal as the debtor amortizes that $50,000 through the plan (and after payments under the plan are completed); the creditor will get a second payment of the $267 principal portion of the $1,932 arrearages; the creditor will get a second measure of interest on the $267 principal portion of the $1,932 arrearages; and the creditor will get interest on interest to the extent of the $1,665 portion of the arrearage that is unpaid interest. If the contract imposes late charges on account of the unpaid prepetition installments, the late charges are added to the arrearages24 and the mortgage holder receives interest on the late charges in addition to the multiples of interest on interest and principal.

[13]

This is not a pretty picture. In the typical Chapter 13 case, Rake takes money out of the pockets of unsecured creditors and gives it to the oversecured mortgage holder in the guise of curing defaults. Applied literally, Rake is dramatically inequitable to unsecured creditors and to debtors in Chapter 13 cases. The unfairness of Rake is discussed by Congressman Brooks as the motivation behind the enactment of § 1322(e) in 1994. The collection of interest on interest, costs, fees and other charges, though not bargained for by residential mortgage holders, will persist as an element of curing default in Chapter 13 cases until the 1994 amendments become fully effective.25

[14]

The example above stops short of tackling the other side of the equation: how is the mortgage holder crediting the various components of principal, interest, interest on principal and interest on interest as it receives regular monthly payments and payments to cure defaults through the plan?26 Assume further that the plan cures the $1,932 arrearage claim with 10 percent interest over 24 months with monthly payments of $89. In the first month after confirmation, the mortgage holder will receive the regular installment of $483 and a second payment of $89. If the mortgage holder filed a claim for the full $50,000 principal balance and a separate arrearage claim for $1,932, it is likely that the mortgage holder’s computer will separately account for the $483 payment and the $89 payment. Typically, the mortgage servicer’s computer is programmed to apply the $483 first to costs, charges and attorneys’ fees allowed by contract.27 This allocation is guaranteed to irreparably convolute all of the mortgage accounting that follows, for the life of the plan and after.28 If enlightened enough to know that such charges are part of the separate arrearage claim, then the mortgage holder will allocate the $483 payment to principal and interest according to the original amortization schedule for $50,000 with 10 percent interest over 20 years. Using these factors, the first $483 payment will be credited $67 to principal and $416 to interest.

[15]

But what about the $89 arrearage payment? The first $89 payment contains $73 of principal and $16 of interest based on the amortization of $1,932 with 10 percent interest over 24 months. But contained within that $1,932 was $267 of unpaid principal from the original amortization of $50,000. A (difficult to calculate) portion of the $89 arrearage payment is actually payment of principal. Does the mortgage holder determine that included portion and credit that fraction against the $50,000 principal balance? Not on this planet. More likely, the entire $89 payment is credited to the interest portion of the arrearages consistent with the usual contract rate that interest is paid before principal. But, as discussed in more detail below,29 isn’t the entire $1,932 arrearage claim really part of the $50,000 allowed secured claim? If so, shouldn’t at least the $73 “principal” portion of the arrearage payment be credited against the $50,000 allowed secured claim?

[16]

The reported cases rarely work through these calculations, and the chances are that few mortgage holders can do so through routine servicing mechanisms. Debtors have to force the issue by objecting to the double collection of the principal portion of the prepetition, unpaid installments. When the mortgage is oversecured and protected from modification, the calculation is not too difficult because the mortgage holder can simply reduce its principal balance ($50,000 in the example) by the amount of principal already included in its arrearage claim ($267 in the example). When the mortgage is undersecured, the payment of interest on arrearages and the allocation to principal and interest after confirmation become life threatening calculations.30


 

1  508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993).

 

2  See, e.g., Cardinal Fed. Sav. & Loan Ass’n v. Colegrove (In re Colegrove), 771 F.2d 119 (6th Cir. 1985) (prevailing market rate for similar loans with a maximum of the contract rate); Blinde v. Spader (In re Spader), 66 B.R. 618 (W.D. Mo. 1986) (state statutory rate rather than contract rate); In re Trigwell, 67 B.R. 808 (Bankr. C.D. Cal. 1986) (“market rate” with no cap at underlying contract rate); In re Minick, 63 B.R. 440 (Bankr. D.D.C. 1986) (contract rate); In re Frey, 34 B.R. 607 (Bankr. M.D. Pa. 1983) (contract rate); In re Thorne, 34 B.R. 428 (Bankr. E.D. Tenn. 1983) (contract rate); In re Wilkinson, 33 B.R. 933 (Bankr. S.D.N.Y. 1983) (current market rate for U.S. Treasury bonds); In re Stratton, 30 B.R. 44 (Bankr. W.D. Mich. 1983) (contract rate).

 

3  See O’Connell v. Troy & Nichols, Inc. (In re Cabrera), 99 F.3d 684, 685 (5th Cir. 1996) (Contract rate of 10.5% is appropriate interest rate on arrearages, not usual cramdown rate of 8%. 1989 mortgage note provided “‘all past due installments of principal and interest shall bear interest from maturity at [10.5% per annum].’” “On the facts presented here—and without opining on the correctness of the [In re Sauls, 161 B.R. 794 (Bankr. S.D. Tex. 1993),] rationale as applied to other cases—we believe the secured claim for the arrearage should bear interest at the rate provided for in the note rather than at the lower rate proposed by the Cabreras, in order to comply with the present value requirement of 11 U.S.C. § 1325(a)(5)(B)(ii).”); In re Harned, 166 B.R. 255, 256–57 (Bankr. E.D. Pa. 1994) (Where the debtor failed to introduce any evidence of the appropriate interest rate, oversecured mortgage holder is entitled to pre- and postconfirmation interest at the contract rate. “[B]ecause the Debtor has stipulated that Boulevard’s claim is oversecured and did not succeed in introducing into the record any evidence of an appropriate interest rate different from the contract rate, we have no choice but to permit Boulevard to include, in the Claim, interest on arrears at the [contract] rate.”); In re Sauls, 161 B.R. 794, 796 (Bankr. S.D. Tex. 1993) (The appropriate rate of postpetition interest to be paid on the arrearage claim of a mortgage holder after Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993), and Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993), “is the non-default contract rate unless the particular facts of the case show some other rate to be appropriate.”).

 

4  See In re Bagne, 219 B.R. 272, 275–76 (Bankr. E.D. Cal. 1998) (For mortgage loans entered into before October 22, 1994, with respect to which the debtor proposes to cure defaults and maintain payments under § 1322(b)(5), rate of interest on the arrearages is the “prevailing market rate.” “[T]he Supreme Court has explained that this default amount, by virtue of § 1322(b)(5), is excepted from the prohibition against modification found in § 1322(b)(2). . . . [I]t may be modified pursuant to § 1325(a)(5). Thus the appropriate rate of interest on the arrearage claim is the rate necessary under section 1325(a)(5) to provide the creditor with a payment stream with a present value equal to the default amount. . . . ‘[T]he prevailing market rate for a loan of a term equal to the payout period, with due consideration of the quality of the security and the risk of subsequent default.’ Farm Credit Bank of Spokane v. Fowler (In re Fowler), 903 F.2d 694, 697 (9th Cir. 1990) . . . . Thus, for contracts entered into prior to October 22, 1994 . . . if a debtor seeks to cure the arrearage over the life of a plan by means of § 1325(a)(5), the debtor’s plan must provide for a market rate of interest on the arrearage.” Court grants parties an opportunity to present evidence on the Fowler factors.); In re Hatcher, 202 B.R. 626, 631 (Bankr. E.D. Okla. 1996) (Applying Hardzog v. Federal Land Bank of Wichita (In re Hardzog), 901 F.2d 858 (10th Cir. 1990), “‘in the absence of special circumstances, such as the market rate being higher than the contract rate, Bankruptcy Courts should use the current market rate of interest used for similar loans in the region.’” Because the only evidence presented was the 10% rate charged by the mortgage holder for similar loans, 10% interest on arrearage claim was appropriate interest rate.), aff’d in part, dismissed in part for lack of jurisdiction, 208 B.R. 959 (B.A.P. 10th Cir. 1997); Willett v. Midfirst Bank (In re Willett), 196 B.R. 732, 734 (Bankr. W.D. Pa. 1996) (Citing GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993), “the appropriate rate which should be applied to arrearages is the current market rate of interest for a loan of similar character, amount and duration. . . . ‘The contract rate is a fair place to begin. . . . [I]t would be appropriate, in the absence of a stipulation, for a bankruptcy court to require the debtor to come forward with some evidence that the creditor’s current rate is less than the contract rate.’”); In re Henson, 182 B.R. 584, 587 (Bankr. N.D. Okla. 1995), and In re Henson, 182 B.R. 588 (Bankr. N.D. Okla. 1995) (“[Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993)] did not specify any rate of interest. Rake v. Wade did observe that the purpose of interest is to provide secured creditors with the present value of their claims. . . . This indicates a market rate of interest, rather than a more or less arbitrary (or even punitive) contract rate.”); In re Adams, 176 B.R. 9, 10 (Bankr. E.D.N.C. 1994) (“Postconfirmation interest on arrearage claims is required by § 1325(a)(5)(B). [Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993)] . . . . That section provides . . . that the secured creditor receive through the plan the present value of the secured claim as of the effective date of the plan. The Fourth Circuit Court of Appeals held that the applicable rate to ensure that the creditor receives its present value is the creditor’s market rate not to exceed the contract rate. United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993).”); In re Lewis, 170 B.R. 861, 868 (Bankr. D. Md. 1994) (After Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993), United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993), controls the interest rate on arrearages paid to an oversecured mortgage holder under § 1322(b)(5). “[T]he task of a court within the Fourth Circuit is [to] ascertain the interest rate currently charged by the secured creditor or similar lenders. Many times this can be determined from the creditor’s posted rates at its place of business or from its advertising. But it is uneconomic to have the parties in each case bear the cost of ascertaining the creditor’s underwriting costs or costs of purchasing similar loans. . . . [T]he burden must be placed upon the lender to come forward with the information required because of its access to the necessary data and its desire to protect proprietary information. But there can be no argument that the restructured loan is less costly to the lender than a voluntarily elected new loan. . . . In summary, . . . [the creditor] is entitled to interest at the contract rate on the arrearages until the effective date of confirmation of debtor’s plan. After confirmation [the creditor] is entitled to interest under the United Carolina Bank rule, that is, at the rate currently charged in the secured creditor’s lending market for similar loans in the area less the cost incurred by the lender in obtaining such loans. However, the interest rate is capped at the contract rate to which the secured creditor originally agreed. . . . [T]here can be no universal one-size-fits-all pronouncement as to the deductions for the lender’s expense. . . . [T]hat fact must be ascertained after full discovery on a case by case basis.”); DeSarno v. County of Allegheny (In re DeSarno), 169 B.R. 329, 335–36 (Bankr. W.D. Pa. 1994) (The appropriate interest rate payable to a state or a municipality with an oversecured real estate tax lien is the rate described by the Third Circuit in GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993). “The hypothetical ‘creditor’ contemplated by the Third Circuit’s test in GMAC v. Jones was not a lien creditor, but rather a bank or other similar type of financial institution. Municipalities and counties such as the Claimants are not in the business of lending money, therefore, the ‘coerced loan’ theory does not fit neatly. However, this court believes that the ‘coerced loan’ theory can apply to the Claimants if the interest rate reflects the reasonable cost of interest to the municipality and the county, as of the effective date of the plan, over a 60 month period. The market rate of interest for a municipal creditor varies from the rate charged by a consumer or commercial lender because municipal interest is free of federal tax to the owner. . . . Daily trade publications such as the Bond Buyer publish the historical interest rates for municipal bonds. This court believes that such interest rates best reflect a ‘loan similar in character’ under these circumstances. The Debtors may apply such appropriate interest rates, as published in the Bond Buyer or a like publication, for debt with a 5 year term or longer for a ‘AA’ rated county . . . and an ‘A’ rated municipality.” The interest allowed by § 506(b) “will accrue until payment of the secured claim or until the effective date of the plan” and § 1325(a)(5)(B)(ii) “further entitles oversecured creditors to post-confirmation interest.”), aff’d in part, rev’d in part, sub nom. Rankin v. DeSarno (In re DeSarno), 89 F.3d 1123, 1130 (3d Cir. 1996) (State statutory interest rate is appropriate cramdown interest rate for tax liens under § 1325(a)(5). “Since municipalities are not for-profit lending institutions and do not regularly extend loans that can be used to determine the appropriate rate of interest, the case at bar is not on all-fours with [GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993)]. . . . [T]he closest analog to the market loan in Jones is the statutory interest rate here. While the analogy is not perfect, it is sufficient: an entity forced to delay payment that it is entitled to receive is, in effect, extending a loan. And the rate that the municipality charges for those that coerce loans by not paying their property tax bills is twelve percent.”); Townsend v. Dellwood Corp. (In re Townsend), 163 B.R. 272, 273 (Bankr. W.D. Pa. 1994) (After Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993), the appropriate interest rate on arrearages paid through a Chapter 13 plan is the market rate. “11 U.S.C. § 1325(a)(5)(B)(ii) . . . was analyzed and interpreted as applied to a claim secured by a lien on a vehicle, after the amount of the secured claim had been reduced to the amount of the value of the vehicle. [GMAC v. Jones (In re Jones),] 999 F.2d 63 (3d Cir. 1993). That court held that the appropriate rate of interest, using a ‘coerced loan’ theory, is the market rate. As a guideline, it stated that the contract rate was presumptively the market rate and that if a party seeks to depart therefrom, such party must introduce supporting evidence. We conclude that it is appropriate to apply the same rationale to the question here, relating to the delinquency under a residential mortgage. We recognize that mortgage delinquencies have different elements; that part of the delinquency is unpaid principal, part may be taxes, insurance, or attorney fee disbursements, and part may be interest (raising the question whether interest on interest should be allowed). All of these items, however, represent amounts for which the mortgagee is entitled to immediate payment. Payment on all of these at the market rate will provide equitable compensation for the delay in payment imposed upon the mortgagee by the impact of the bankruptcy law. That delay in payment is, in effect, also a ‘coerced loan.’ Accordingly, we will make an order that the interest rate on the delinquent balance shall be the market rate. Since the debtor has asserted that the market rate is 7%, and since the contract rate is 10½%, we will fix a hearing for the presentation of evidence.”).

 

5  See In re Jones, 168 B.R. 146, 150 (Bankr. E.D. Tex. 1994) (In dicta, the appropriate rate of interest that Chapter 13 debtors must pay on arrearages cured under § 1322(b)(5) “should be no different from the approach used in a case under Chapter 11. In that regard, the Court refers the parties to In re Westwood Plaza Apt., Ltd., 147 B.R. 692 (Bankr. E.D. Tex. 1992), in which this Court used the prime rate, and Heartland Federal Savings & Loan Ass’n v. Briscoe Enterprises, Ltd. (In re Briscoe Enterprises, Ltd.), 994 F.2d 1160 (5th Cir. 1993), in which the Fifth Circuit in dicta used the Treasury rate.”).

 

6  See In re Hardware, 189 B.R. 273, 279 (Bankr. E.D.N.Y. 1995) (Interest rate on home mortgage arrearages after Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993) is New York judgment rate of 9%. Judgment rate “creates uniformity and is administratively convenient to the Court . . . and is manifestly fair.”); In re Callahan, 158 B.R. 898, 903 (Bankr. W.D.N.Y. 1993) (“[T]o meet the requirements of Section 1322(b)(5) and, when there is an oversecured mortgage, Section 1325(a)(5), unless the parties otherwise agree to the terms of a cure, Chapter 13 plans must provide for the repayment of prepetition home mortgage arrearages together with a present value factor equal to the New York judgment interest rate until such arrearages are paid in full.” This conclusion is based on “administrative convenience,” on the court’s assessment that the state judgment rate is an “acceptable compromise” among the conflicting interest rate points of view, that arrearages on a state foreclosure judgment would carry interest at the state rate, that the respective costs and benefits of other interest rate calculations would even out over time to approximately the state judgment rate, and that adoption of the easily determined state rate on judgments would eliminate litigation and make the confirmation of Chapter 13 plans more efficient.).

 

7  See In re Gomes, 298 B.R. 506, 508 (Bankr. D.R.I. 2003) (To cure default on a mortgage executed before October 22, 1994, applying Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993), “the rate paid on a United States Treasury Bill with a maturity equivalent to the payment schedule under the plan is adequate compensation for any delay in payment. . . . [W]here the creditor is oversecured and the asset is not traditionally a depreciating asset, there is no reason to add a ‘risk premium’ to this calculation.”); In re Yrlas, 183 B.R. 119, 122 (Bankr. N.D. Tex. 1995) (Interest rate on arrearages after Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993) is the treasury bill rate plus two percentage points to reflect the risk of nonpayment. “Present value is achieved by assuring Ryland a return based on a measurement that includes all necessary factors plus basis points to reflect any appropriate risk of payment by the debtors. That is measured by the Treasury security closest in time to the length of payments plus, in this case, 2% to reflect the risk of payment by a Chapter 13 debtor on his home. . . . [T]he present value interest should run from the petition date.”); In re Wilmsmeyer, 171 B.R. 61, 63, 64 (Bankr. E.D. Mo. 1994) (Postconfirmation interest rate for oversecured claim holder in Chapter 13 case is fixed by a local rule at 3.5% over the Wall Street Journal prime. After Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993), under § 506(b), the contract rate accrues until the effective date of the plan, “at which time the interest is added to the prepetition claim and the creditor thereafter receives the present value of that sum or amount. .  . . [A]n appropriate discount rate should compensate a creditor for the time value of its money and the risks to its principal. . . . [The] Local Rule . . . was designed to consider the prime lending rate on the date of the filing of the Chapter 13 plan and a cushion of 31/2% to ensure that the secured creditor is protected from risks to its principal. To the contrary, the 19.18% contract rate was not intended to merely preserve the status quo, as § 1325(a)(5)(B)(ii) requires, but instead was intended to generate a substantial profitable return on [the creditor’s] investment.”); In re Harris, 167 B.R. 813, 815–17 (Bankr. D.S.C. 1994) (After Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993), oversecured mortgage holder is entitled to preconfirmation interest on arrearages at the contract rate and is entitled to postconfirmation interest at the market rate adjusted and determined consistent with the Fourth Circuit’s opinion in United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993). “In Rake, the Court relied upon Section 506(b) to conclude that oversecured mortgage holders are entitled to preconfirmation interest. NationsBanc, as an oversecured creditor, is entitled to interest on the arrearage at the contractual rate of 17% from the date the debtor filed his bankruptcy petition until the date of the entry of the order. . . . As for postconfirmation interest, the Court looked to Section 1325(a)(5). . . . Although decided prior to the Rake decision, [United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993),] fleshes out the method by which the appropriate interest rate is to be determined under Section 1325(a)(5). To apply the principles set forth in Hall, the court must first determine the market interest rate of similar loans in the area as of the date of the contested confirmation hearing. The court should then put a dollar value on the amount of interest to be paid (interest charge) at the market rate on the total debt (not just the arrearage) at the contractual payment. From this figure, the court should deduct the hypothetical expenses of liquidating the real property if possession was surrendered by the debtor and the hypothetical expenses NationsBanc would actually incur in making a new loan. The resulting total (adjusted interest charge) should then be translated to a corresponding interest rate for repayment of the total debt at the contractual monthly payment. This interest rate should be rounded to the nearest one-tenth of a percent. The resulting interest rate should be used as the discount rate under § 1325(a)(5)(B)(ii) for the payment on the arrearage, (so long as this rate does not exceed the contract rate), even if the resulting interest rate is less than the interest rate originally proposed in the plan. Prior to Hall, this court used a discount rate set on an annual basis by a court sanctioned committee. The discount rate as set June 1, 1993 was 7%. . . . In this case, the debtor’s proposed interest rate equals or exceeds the 7% rate set by committee and is, therefore, presumptively reasonable. The debtor, therefore, has satisfied his burden of proof. . . . The only evidence offered at the hearing regarding NationsBanc’s current lending rates was the rates published in the Greenville News. Of the various rates listed for NationsBanc, the highest rate appears to be 8.375%. NationsBanc offered no evidence or argument to dispute debtor’s claim that this is NationsBanc’s current interest rate. . . . [N]o evidence was presented regarding the expenses of liquidation or of making a new loan in the marketplace. Evidence of these expenses would serve only to reduce the amount of interest which the debtor would have to pay on the arrearage claim. Moreover, the creditor would be the only source of the information required to present evidence of these expenses. To place the burden of producing such evidence upon the debtor, therefore, would be impractical and inequitable. Accordingly, this court finds that the debtor has met his burden of establishing that the interest rate proposed in his Chapter 13 Plan meets the requirements of Section 1325(a)(5) and this more than compensates NationsBanc for the delay it will experience in receiving payments on its arrearage claim.”); In re Cureton, 163 B.R. 494, 495–96 (Bankr. E.D. Mich. 1994) (Reading Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993), and Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993) together, debtors’ proposal to pay 7% interest on arrears is permissible notwithstanding contract rate of interest on “principal” of 14.875% because contract has no provision for interest on payments over time to cure an arrearage of the sort contemplated by § 1322(b)(5), and thus 7% does not violate the antimodification provision of § 1322(b)(2). “The Supreme Court’s decision in Nobelman, particularly when read in conjunction with Rake, suggests that Cardinal Federal Savings & Loan Ass’n v. Colegrove (In re Colegrove), 771 F.2d 119 (6th Cir. 1985) has been overruled insofar as the latter decision authorized a debtor to pay less than the rate of interest to which a mortgagee is contractually entitled when the debtor cures arrearages on a debt protected by § 1322(b)(2). . . . [Section] 1322(b)(5) allows a debtor to pay the arrears . . . ‘within a reasonable time.’ There is nothing in the parties’ note or mortgage which even arguably purports to give the Debtors the right to ‘string out’ the cure payment over time, much less define the applicable rate of interest to be paid by the Debtors should they choose to exercise that right. And since there is no provision for such interest, the Debtors’ plan does not ‘modify’ Barclays’ contractual rights in violation of § 1322(b)(2).”); In re Casey, 159 B.R. 963, 964 (Bankr. M.D. Ala. 1993) (Without discussion, “[t]he rate of interest to be paid on the [arrearage] claim . . . is hereby set at 9 percent per annum, subject to reconsideration by the application of either party to these proceedings.”).

 

8  When a Chapter 13 plan cures default with respect to a contract entered into after October 22, 1994, the possibility of multiple interest rates is minimized by § 1322(e). 11 U.S.C. § 1322(e) begins “Notwithstanding . . . sections 506(b) and 1325(a)(5).” This introductory phrase substitutes “the underlying agreement and applicable nonbankruptcy law” for §§ 506(b) and 1325(a)(5) as the source for the interest rate rule when a Chapter 13 debtor cures default through the plan. See §§ 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994 and 136.2 [ Rate of Interest to Cure Default: Contracts after October 22, 1994 ] § 83.4  Rate of Interest to Cure Default: Contracts after October 22, 1994.

 

9  489 U.S. 235, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989).

 

10  See Bradford v. Crozier (In re Laymon), 958 F.2d 72 (5th Cir.), cert. denied, 506 U.S. 917, 113 S. Ct. 328, 121 L. Ed. 2d 247 (1992) (Oversecured claim that arises from a contract is entitled to the contract interest rate postpetition under § 506(b). Courts are “not required in all cases to apply a contractual default rate of interest in determining the amount of an ‘allowed secured claim’ within the meaning of [§ 506(b)].”); KCC-Leawood Corporate Manor I v. Travelers Ins. Co., 117 B.R. 969, 973–74 (W.D. Mo. 1989), appeal dismissed, 908 F.2d 343 (8th Cir. 1990) (“According to the statute, and the majority of courts interpreting it, the amount of the allowed interest is that ‘provided under the agreement under which such claim arose.’ . . . [P]ermitting contract rate interest (under Section 506(b)) is fair and equitable . . . when limited by the value of the collateral.”); In re PCH Assocs., 122 B.R. 181 (Bankr. S.D.N.Y. 1990) (Contract rate is allowed with respect to postpetition defaults under § 506(b). Default interest rate is not applicable when debtor cures default through Chapter 11 plan.); In re DWS Inv., Inc., 121 B.R. 845 (Bankr. C.D. Cal. 1990) (“Usually, the court should apply the contract rate, but it has the power to apply a different rate depending upon equitable considerations.” Court refuses to allow contract default rate; allows predefault contract interest rate for purposes of § 506(b) when predefault rate is not greatly different from current market rates.); Connecticut Gen. Life Ins. Co. v. Schaumburg Hotel Owner Ltd. Partnership (In re Schaumburg Hotel Owner Ltd. Partnership), 97 B.R. 943, 951 (Bankr. N.D. Ill. 1989) (“Section 506(b) permits an oversecured creditor to receive interest on its claim and reasonable fees, costs, and charges pursuant to an agreement between the creditor and the debtor. A court should allow contractually bargained for default interest rate under § 506(b) without examining the reasonableness of these rates, provided they fall within the range of acceptable rates.”); Lenz v. Federal Land Bank (In re Lenz), 74 B.R. 413, 416 (Bankr. C.D. Ill. 1987) (“[A]n oversecured creditor, is entitled to interest on the principal amount of the indebtedness at the contract rate up to the effective date of the plan.”); In re W.S. Sheppley & Co., 62 B.R. 271 (Bankr. N.D. Iowa 1986) (Contract rate applies for § 506(b) purposes, and default rate may be applied as a matter of federal law depending on equities of the case.); In re Bates, 58 B.R. 915 (Bankr. W.D. Tenn. 1986) (Ordinarily contract interest rate applies for purposes of § 506(b).).

 

11  See § 116.1 [ Oversecured Claim Holders ] § 78.5  Oversecured Claim Holders. See, e.g., DeSarno v. County of Allegheny (In re DeSarno), 169 B.R. 329 (Bankr. W.D. Pa. 1994) (A state or municipality with an oversecured real estate tax lien is entitled to interest after Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993) at the market rate of interest for a municipal creditor. Applying GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993), the market rate for a municipal creditor is found in trade publications such as the Bond Buyer that publish historical interest rates for municipal bonds.), aff’d in part, rev’d in part, sub nom. Rankin v. DeSarno (In re DeSarno), 89 F.3d 1123, 1130 (3d Cir. 1996) (State statutory interest rate is appropriate cramdown interest rate for tax liens under § 1325(a)(5). “[T]he closest analog to the market loan in [GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993),] is the statutory interest rate here. While the analogy is not perfect, it is sufficient: an entity forced to delay payment that it is entitled to receive is, in effect, extending a loan. And the rate that the municipality charges for those that coerce loans by not paying their property tax bills is twelve percent.”).

 

12  In re Henry, 87 B.R. 303 (Bankr. D. Del. 1988).

 

13  In re Laza, 69 B.R. 669 (Bankr. E.D.N.Y. 1987).

 

14  See §§ 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2  Interest Rate Anarchy: Present Value before Till and 112.2 [ Present Value After Till ] § 77.3  Present Value after Till.

 

15  541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004).

 

16  In Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993), Justice Thomas stated that § 506(b) allows interest to an oversecured mortgage holder up to the value of its collateral “from the petition date until the confirmation or effective date of the plan.” 508 U.S. at 471 (emphasis added). In a Chapter 13 case, the date of confirmation and the effective date typically are the same date because Chapter 13 debtors rarely include provisions in the plan moving the “effective date” to some other date. However, there is nothing in the Bankruptcy Code to prohibit a Chapter 13 debtor from providing in the plan that the effective date will be some date other than the date of confirmation. In such a situation, Justice Thomas’s use of both dates to describe the date through which § 506(b) would entitle an oversecured mortgage holder to interest in a Chapter 13 case could create some confusion. The better rule might be that § 506(b) controls through the later of the confirmation date or the effective date of the plan.

 

17  See DeSarno v. County of Allegheny (In re DeSarno), 169 B.R. 329 (Bankr. W.D. Pa. 1994) (After Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993), the interest allowed by § 506(b) “will accrue until payment of the secured claim or until the effective date of the plan,” and § 1325(a)(5)(B)(ii) “further entitles oversecured creditors to post-confirmation interest.”), aff’d in part, rev’d in part, sub nom. Rankin v. DeSarno (In re DeSarno), 89 F.3d 1123 (3d Cir. 1996).); In re Wilmsmeyer, 171 B.R. 61, 63, 64 (Bankr. E.D. Mo. 1994) (After Rake, under § 506(b), the contract rate accrues until the effective date of the plan, “at which time the interest is added to the prepetition claim and the creditor thereafter receives the present value of that sum or amount. . . . [A]n appropriate discount rate should compensate a creditor for the time value of its money and the risks to its principal. . . . [The] Local Rule . . . was designed to consider the prime lending rate on the date of the filing of the Chapter 13 plan and a cushion of 31/2% to ensure that the secured creditor is protected from risks to its principal.”); In re Lewis, 170 B.R. 861, 868 (Bankr. D. Md. 1994) (“In summary, . . . [the creditor] is entitled to interest at the contract rate on the arrearages until the effective date of confirmation of debtor’s plan. After confirmation [the creditor] is entitled to interest under the [United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993)] rule, that is, at the rate currently charged in the secured creditor’s lending market for similar loans in the area less the cost incurred by the lender in obtaining such loans. However, the interest rate is capped at the contract rate to which the secured creditor originally agreed.”). See also Key Bank N.A. v. Milham (In re Milham), 141 F.3d 420, 425 (2d Cir. 1998) (Oversecured car lender adds contract interest through the effective date of the plan to determine the allowed secured claim, then is entitled to a different discount factor through the plan under § 1325(a)(5)(B)(ii). “[A]n oversecured creditor . . . is entitled to receive § 506(b) interest only until the confirmation date of the Chapter 13 reorganization plan. At that time, the accumulated pendency interest becomes a part of the allowed secured claim, and the plan must provide for payment of the present value of such allowed claim as of the effective date of the plan. Present value is achieved by the payment of interest at a rate calculated in accordance with our holding in [GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997)].”).

 

18  See §§ 116.1 [ Oversecured Claim Holders ] § 78.5  Oversecured Claim Holders, 140.1 [ Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 ] § 84.2  Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 and 141.1 [ Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994 ] § 84.3  Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994. See, e.g., In re Harris, 167 B.R. 813, 815–17 (Bankr. D.S.C. 1994) (After Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993), oversecured mortgage holder is entitled to preconfirmation interest on arrearages at the contract rate and is entitled to postconfirmation interest at the market rate adjusted and determined consistent with the Fourth Circuit’s opinion in United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993). “NationsBanc, as an oversecured creditor, is entitled to interest on the arrearage at the contractual rate of 17% from the date the debtor filed his bankruptcy petition until the date of the entry of the order. . . . As for postconfirmation interest, the Court looked to Section 1325(a)(5). . . . Although decided prior to the Rake decision, [United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993),] fleshes out the method by which the appropriate interest rate is to be determined under Section 1325(a)(5). . . . To apply the principles set forth in Hall, the court must first determine the market interest rate of similar loans in the area as of the date of the contested confirmation hearing. The court should then put a dollar value on the amount of interest to be paid (interest charge) at the market rate on the total debt (not just the arrearage) at the contractual payment. From this figure, the court should deduct the hypothetical expenses of liquidating the real property if possession was surrendered by the debtor and the hypothetical expenses NationsBanc would actually incur in making a new loan. The resulting total (adjusted interest charge) should then be translated to a corresponding interest rate for repayment of the total debt at the contractual monthly payment. This interest rate should be rounded to the nearest one-tenth of a percent. The resulting interest rate should be used as the discount rate under § 1325(a)(5)(B)(ii) for the payment on the arrearage, (so long as this rate does not exceed the contract rate), even if the resulting interest rate is less than the interest rate originally proposed in the plan. . . . [N]o evidence was presented regarding the expenses of liquidation or of making a new loan in the marketplace. Evidence of these expenses would serve only to reduce the amount of interest which the debtor would have to pay on the arrearage claim.”).

 

19  See § 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2  Interest Rate Anarchy: Present Value before Till.

 

20  329 U.S. 156, 67 S. Ct. 237, 91 L. Ed. 162 (1946).

 

21  See H.R. Rep. No. 95-595, at 356–57 (1977); S. Rep. No. 95-989, at 68 (1978). But see In re Casey, 159 B.R. 963, 964 (Bankr. M.D. Ala. 1993) (Citing Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 67 S. Ct. 237, 91 L. Ed. 162 (1946), interest on interest was once considered to be inequitable or unfair in bankruptcy cases; however, Vanston was based on the former Bankruptcy Act, and “[w]e are thus bound by the superior federal law set out in § 1325(a)(5) and interpreted conclusively for us in Rake v. Wade.”). See also In re Hardware, 189 B.R. 273, 277 (Bankr. E.D.N.Y. 1995) (After Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993) mortgagee, “whether fully secured or undersecured, is entitled to the present value of its prepetition arrears, for the sheer reason that it would be inequitable not to provide such relief.” Court rejects debtor’s argument that § 502(b)(2) prohibits postconfirmation interest on arrears, even with respect to an undersecured mortgage holder.).

 

22  The briefs filed in the Supreme Court in Rake did cite and discuss Vanston.

 

23  See §§ 114.1 [ Calculating Payments to Secured Claim Holders ] § 78.2  Calculating Payments to Secured Claim Holders, 114.2 [ Accounting for Adequate Protection ] § 78.3  Accounting for Adequate Protection and 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations for discussion of similar examples with respect to secured claims other than home mortgages.

 

24  See § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges.

 

25  As explained in § 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994, 11 U.S.C. § 1322(e) applies to agreements entered into after October 22, 1994. See Pub. L. No. 103-394, § 702(b)(2)(D), 108 Stat. 4106 (1994).

 

26  This problem of allocation is discussed further in §§ 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations, 128.2 [ Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations ] § 80.14  Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations, 137.1 [ Undersecured Mortgage and Interest to Cure Default ] § 83.5  Undersecured Mortgage and Interest to Cure Default, 140.1 [ Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 ] § 84.2  Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 and 141.1 [ Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994 ] § 84.3  Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994.

 

27  See § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges. See, e.g., Telfair v. First Union Mortgage Corp., 216 F.3d 1333 (11th Cir. 2000), cert. denied, 531 U.S. 1073, 121 S. Ct. 765, 148 L. Ed. 2d 666 (2001) (Mortgage holder can apply payments from the debtor first to recover postconfirmation attorneys’ fees and premiums for force-written hazard insurance.); In re Good, 207 B.R. 686 (Bankr. D. Idaho 1997) (Plan cannot modify contract allocation of payments first to interest and then to principal.).

 

28  See, e.g., In re Wines, 239 B.R. 703, 708 n.7 (Bankr. D.N.J. 1999) (To calculate amount due when debtors sold house and paid off mortgage during Chapter 13 plan, late charges are allowed according to the contract. In a note, “Fleet could have charged interest on the fees and expenses included in its arrears, but chose not to.”).

 

29  See § 137.1 [ Undersecured Mortgage and Interest to Cure Default ] § 83.5  Undersecured Mortgage and Interest to Cure Default.

 

30  See §§ 137.1 [ Undersecured Mortgage and Interest to Cure Default ] § 83.5  Undersecured Mortgage and Interest to Cure Default, 140.1 [ Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 ] § 84.2  Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 and 141.1 [ Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994 ] § 84.3  Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994.